Tuesday, March 18, 2008
[Originally for Sramana Mitra's site.]
In the prequel, I pointed out that Texas Instrument (TXN) supplied semiconductor solutions to many markets making it one of the largest semiconductor companies in the world. Before I move on to dissect its businesses in detail, I wish to review the company’s 2007 financial results to put the rest of the series in perspective.
TI’s total revenue for 2007 was $13.83bn at a gross margin of 53% and an operating margin of 25.3%. This was a 3% decrease from the 2006 figure of $13.73bn. The company attributes this decrease to lower demand for its RISC processor, lower demand for mobile chips and DLP products. The margins, on the other hand, are certainly impressive when compared to the rest of the industry. The semiconductor industry’s gross margin average is at 50.5% while the operating margin average is at 18.6%. TI’s superior margins are due to its continued shift to higher margin products such as high-performance analog (HPA) and changes in its manufacturing strategy. The corresponding EPS was a healthy $1.83 giving it a P/E ratio of 15.41 as on March 15, 2008.
The education technology business has been a steady source of about $500mn for the past four years. This year’s $526mn amounted to 3.8% of the company’s revenues. With a fairly mature product-line the business continues to become more efficient recording its 11th straight year of improved margins and profitability. The gross margin for this business unit was 64.6% and the corresponding operating margin was 39.4%.
The semiconductor business generated $13.31bn in 2007 at a gross margin of 53.2% and an operating margin of 29.2%. The operating profit increased by $52mn from $3.83bn to $3.88bn. The two key components of the business unit, namely analog and DSP, both yielded over $5bn in revenue. The two together accounted for 80% of the semiconductor revenues.
Analog revenues were up 1% from last year to $5.29bn driven by a 9% growth in HPA. This was offset by reduced sales in custom analog parts for mobile phones, an offshoot of its customers adapting a multiple vendor strategy. DSP revenue was at $5.07bn and also saw declines across many markets. On the other hand, TI has about 65% of the DSP market share. This business continues to remain one of TI’s fortresses. The company’s OMAP processors have substantial traction in the mobile world and will be a steady source of income moving forward.
Nokia, as TI’s single-largest customer, accounted for 19% of its 2007 revenue. With the Finnish company opting to source chips from ST Microelectronics, Infineon and Broadcom as well, this figure may go down in the years to come. However, more than 80% of TI’s revenue comes from outside the US. The fairly diverse and global nature of its customer base, coupled with the markets and applications it caters to, provides TI substantial resilience to an economic slowdown.
TI is also buttressed by sound economics. The higher profitability from its product mix and its move towards better capital efficiency has generated a cash flow of over $4bn this year. The company also managed to increase its return on invested capital for the sixth year in a row.
The continued thrust for efficiency and higher margin products are in line with TI’s goals – to grow faster than its markets, grow earning per share faster than revenue, 55% gross margins and 30% operating margins. Whether it can grow faster than the competition in all its markets is debatable, but its track record gives me the confidence that its margin goals are very attainable.